The Devil's In Your Debit Card

In much the same way we now look back at disasters like Enron and Arthur Andersen and wonder how the powers that be could have let the same organization be both advisor and accountant, we will someday look back and wonder how we let bank and business moguls foist off the debit card devil on a trusting populace.

WHAT IS A DEBIT CARD?

A debit card started out as an automated teller machine (ATM) card. It was designed as a key to a person's bank account that could be used to make withdrawals and deposits, and do other banking chores through multiple, convenient, kiosk interfaces instead of standing in line in a bank to see a human teller. Banks saved millions by installing these machines rather than hiring new tellers. Some banks even made commercials thanking their customers for using the ATMs instead of using the nonautomated and much more expensive real live tellers. Their advertising was filled with references to their banks' efficiency, and of the money they were saving as a result of their ATMs.

Then it became "Shopping with your ATM card." As with many ideas that start out with good intentions, some skillful marketing combined with greed soon changed the complexion of the handy card and the attitude of most banks. Not only has the ATM card changed into a debit card, but the banks changed their whole philosophy to take advantage of the different rules for using the "new" kind of plastic money. There are now more than 230 million of those debit cards in the United States. And it's a bad idea.

WHY ARE THEY TRYING TO GET US TO SWITCH?

In the majority of cases, the per transaction cost is lower for the debit card than it is for the ATM card, sometimes considerably lower. That in and of itself is not bad. In fact, if those savings were passed on to the consumers, it would be one of the few good points for using the cards. Would it come as a big surprise to you if you discovered that most banks and merchants just smile and shove those savings into their tills?

Those huge savings are only a minor consideration in the promotion aimed at switching plastic users from credit to debit cards. With credit cards, the consumer has the money and the rules say that, in disputes, the merchant must prove the consumer owes them any contested sum. The consumer is protected from interest and penalties until the conflict is resolved.

With a debit card, however, the merchant has your money and it is almost entirely up to you to try get your money back, even if the merchant's claim to your money is totally false! They have the money, and you often have to sue to get it back. Want to guess what your chances are? Slim to nil. Now you understand the reason they want you to switch to debit cards.

Say you see a diamond ring on a website you just can't live without. You pay for it with a credit card. When the ring arrives, however, it is a sad imitation of what you saw on TV. It isn't even a diamond. You tell the bank that issued your credit card what happened and you have the charge removed from your bill, or at least the charge is put into limbo until you get the diamond you ordered. Either you get what you ordered, or it doesn't cost you a dime.

It is another story altogether if you paid with a debit card. For those who gave the crooked website an immediate payment via a debit card, it's "Sorry, Charlie" time. It is the phony ring sellers that now have your money. You will probably have to take some kind of legal action, at your own expense, to even have a chance of getting your money back.

SADLY, IT GETS WORSE!

Let's use the same example as above, but change the circumstances. This time, the company you ordered the ring from goes out of business and never sends you anything. With a credit card charge, it is you who still has the money and a call to your card company gets the charge removed from your bill. You now have more money than you thought, so you add it to your savings. End of story.

Not so lucky for you if you paid for the ring with a debit card. The money was transferred from your account to the now-defunct company's account within minutes of your order, and your money is now gone. You can put in a claim against the company, but if you get anything, it will be after a long legal battle and it will probably be a fraction of a penny for every dollar of your loss. Further, you do not have the power of a major bank in your corner; it is between you and the bankrupt company.

Your debit card issuing bank may or may not make sympathetic noises, but somewhere in their paneled offices they are stuffing the transaction fees into their pockets and dancing with glee because even though you used their debit card, they are off the hook.

In fact, anytime your debit card is used to make a purchase and the card has not already been reported stolen, the money is gone from your bank account! Here's an example: You dine in a nice restaurant and pay for the meal with your debit card. Your server acts as your cashier and takes your card. While he or she is taking care of the bill, he also copies down your debit card number for his own use.

You go home. Your waitperson gets on the Internet and uses your debit card account number to order a nice gold necklace for his significant other. Fortunately for the merchant, the thief, and your bank, and unfortunately for you, you had just enough in your account to pay for the necklace.

The merchant now has their profit, the bank has the money it made off of the transaction fees, the thief now has the necklace, and you are now broke. Too bad. So sad! After you prove that you were the victim, that you did not place the order for the necklace, you might get your money back, but chances are it will be a long time, and in the meantime, you are out of luck and out of money.

THE PROBLEM GROWS

This debit card problem grows at a compound annual rate of 37% per year, and has for at least the last 15 years. Bank research indicates that almost half of credit card billings could have gone the debit card route and saved the banks and merchants another ton of money. How long will it be before advertising succeeds in getting those transactions switched? Online debit card processing fees are lower for both the bank and merchant, compared to the same per transaction cost of credit cards. The banks and businesses lick their lips as more people fall into their clutches and change over to debit cards for more of their purchases.

If all of this was not bad enough, here's something even more astounding. These folks don't miss a trick. In researching this article I discovered some banks now make cards that can be used either way. They can now be used to process transactions either as a debit card, or as a credit card. Be very, very careful. Make sure you are making your transaction as a credit card, or you could be very sorry.

SOME ATM FEES CAN BE AVOIDED

In the beginning, banks put in ATMs to save the money they would have had to pay for more tellers. They saved tons. They have now realized you still need access to your money, and remember, those new tellers they need never get hired. The only way to get your money, in many cases, is through the ATMs. Hmmm. There must be a way to make money here.

Ah! They can charge you a fee to get your money from the much-cheaper-than-a-real-teller machine. Such fees are now common, proliferating and increasing in cost. Again, it is a case of who has the money. And as more banks and businesses merge, with the blessing of those who are supposed to be protecting the consumer, they have an ever-deeper and firmer grip on your wallet. And that ability to reach further into your pocket is providing larger profits for the banks.

A survey by Bankrate.com shows more than 75% of banks now charge fees to use ATMs, and that those fees are increasing. While the average fee, on a national basis, is now more than $1.38, more than 40% are charging $1.50. Here in Seattle, the bank at which I had my account until recently charges nonmembers a $1.75 fee. There are even some banks, though in the minority, that charge their own customers for withdrawing their own money directly from their own ATMs.

Willie Sutton said that he robbed banks because that was where the money was. These days, banks are of like mind — they take the customers' money because they can. Banks are now relieving customers of somewhere around $2 billion a year in ATM fees. If ever there was a need for consumer protection —!

BANNING ATM SURCHARGES

San Francisco and Santa Monica, CA, and the states of Connecticut and Iowa, have done their best to get ATM surcharges banned. As soon as they tried to get the laws put into effect, the banks sued. For all practical purposes, the courts told those cities and states to go fish. The courts judged that local governments can't impose regulations on federally charted banks. Action needs to be taken on the national level. Yeah, that will happen. It is scheduled for the day after the ice-skating party at the new rink in Hades.

But even if ATM surcharges can't be banned, it is possible to avoid some of the fees. So long as you're not in a hurry, in most places you can still stand in a long line at the bank and speak with one of the few remaining tellers. (Be careful that the bank does not charge for that. Yes, some do!) Or, instead of getting small amounts of money frequently, you can get larger amounts from the ATMs, just not so often. Muggers much prefer this solution.

As most banks still don't charge their own customers to use their own ATMs, make sure you use the ATMs placed by your own bank. If your bank doesn't have a lot of ATMs where you need them, consider switching to a larger bank with more machines. Finally, and this is the favorite modus operandi of the grab-a-latte-at-the-supermarket crowd, get some cash back when you pay at the grocery store.

ONCE BURNED, TWICE SHY

While the thought process behind the subhead above may apply in many areas, it does not seem to have sunk in for those who use ATM/debit cards. In many cases, when a debit card is used to withdraw funds or sometimes just pay for something, both the merchant's bank and your bank assess a charge for the transaction. If you guessed that the number of banks charging these "double-dipping" fees is increasing, you would be correct again.

Look at it this way. You're in a 7-Eleven and need a couple of bucks more than you've got in your pocket to buy the beer that's on special for $2 off. No problem, there's an ATM right in the store. Not your bank's ATM, mind you, but what the heck. You put in your ATM card, get $20, buy the beer you wanted and go home. That's pretty simple and convenient.

Well, it turns out that whole deal wasn't quite the bargain you thought it was. The ATM charged you $1.50 because you weren't a member of that ATM's banking system, and your bank charged you $1.50 because it had to send money to another bank for the use of that bank's ATM. The $20 you grabbed to save $2 ended up costing you $3. Not a good way to save money. Basically, instead of saving $2, you ended up paying an extra one for your beer. Hope you enjoyed it.

WHO DID THIS TO US?

Would you believe we can thank our very own US Congress for all this? Yep, those good people we elect to write laws to protect us. They did it. When credit cards first appeared, our then­more prudent representatives realized the potential disaster for consumers. They set about creating the Truth In Lending Act (TILA) and a powerful consumer protection called Regulation Z. It protects us well. Bless them.

As stated at the beginning of this article, ATM cards, before transmogrifying into debit cards, were "keys" to your account so you could do your banking electronically via machine. The complete makeover into the debit card of today was not foreseen. That, or the known evolution, was purposely ignored. Either way, the regulation over debit card use is known as the Electronic Funds Transfer Act (EFTA). It boils down to this: TILA protects the consumer, EFTA protects the banks. Apparently, banks have more money than you and I do with which to hire more lobbyists. Maybe about $2 billion more each year.

TIP OF THE ICEBERG

If you think all of this is a huge exaggeration of the problem, let me assure you it isn't. To the contrary, it is much worse than I can make it sound. Some of the major points were condensed in the examples, but this is just the tip of a massive iceberg, and much of the population is running around like the Titanic. Debit card users are all thinking the same thing: This is safe, I have been reassured over and over. Nothing bad can happen.

Unfortunately, the situation could be as disastrous for many of debit card users as it was for some of the folks on the Titanic that April morning back in 1912.

THERE MUST BE SOME GOOD POINTS

Well, maybe there are a couple of minor benefits. First, if you have little self-control when it comes to finances, then a debit card forcibly shuts down your rogue spending when your bank account reaches zero. That keeps you from building up a monumental debt. If you are willing to admit you are that financially challenged, then that sort of a spending limit could be classified as a good point.

Second, because of the tremendous advantage they have over you, many more merchants accept debit cards than credit cards. That is more of an advantage to the merchants, but it results in something of an advantage to you as well. Third and finally, for most people, debit cards are faster to use than writing a check, and you do not have to carry as much cash. Both of those could go on the good side of the ledger.

In all fairness, the two biggies in the industry, Visa Check Card and MasterCard's MoneyMaster, have agreed to give the same protection to reported lost and stolen debit cards as they do to reported lost or stolen credit cards. If you read the references I've given below, you will see how narrow that window of protection actually is.

CONCLUSION

If you use a debit card, I hope this will open your eyes. Click on and read the information linked below. The report written by Ann H. Spiotto of the Federal Reserve Bank of Chicago is by far the most complete, in-depth, and revealing, but the PRIG and BBB articles are the scariest. If you are still not frightened enough after reading these reports to cut up your debit cards, well, you may have a bright future signing up as a contestant for that TV show "Fear Factor" or as the comic-book hero Green Lantern, because you obviously have no fear.

Bruce R. Faber is a Staff Writer for Working Money and never uses a debit card.

REFERENCES AND RELATED READING

"Credit And Debit Cards":
http://www.chicagofed.org/consumerinformation/projectmoneysmart/plasticfraud.cfm

Credit, Debit, Or ACH: Consequences & Liabilities, A Comparison Of The Differences In Consumer Liabilities, a report by Ann H. Spiotto, Federal Reserve Bank of Chicago:
www.chicagofed.org/publications/publicpolicystudies/emergingpayments/pdf/eps-2001-3.pdf

ATM Debit Cards, PIRG Consumer Watchdog Fact Sheet #6 April 1997, revised August 1997:
http://www.pirg.org/consumer/banks/debit/fact.htm

Debit Cards Still Confusing To Many Consumers, from the Better Business Bureau:
www.bbb.org/library/19990204.asp

What Is A Debit Card?
http://www.53.com/corporate/merchant/debit_card.asp

Dodging Those ATM Fees, by Libby Wells:
http://www.bankrate.com/brm/news/atm/19991020.asp

MasterMoney Campaign:
http://www.cardweb.com/cardtrak/news/1997/september/12b_97.html

The Debit Dilemma, by Jim Olizarowicz:
http://www.shift4.com/insight_debit.cfm

VISA Debit Cards:
http://www.creditconnectusa.com

It Is Your Money That Is At Stake:
http://www.nclnet.org/debitpro.htm

Why A Credit Card Is Better Than A Debit Card, by Paul Schrader:
http://acclaimcreditcards.hypermart.net/schra2.htm

Testimony of Michelle Meier, Counsel for Government Affairs by Consumers Union:

http://www.consumersunion.org/finance/debit-test.htm

The Basics: Chargebacks, by Clark Howard:
http://clarkhoward.com/library/tips/chargebacks.html

"Consumer Alert: PayPal's Problems," from PC World:
http://www.pcworld.com/resource/printable/article/0,aid,101525,00.asp

The Ins And Outs Of Debit Cards, by Lucy Lazarony:
http://www.bankrate.com/yho/news/cc/20010813a.asp

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.